The Bank of N.T. Butterfield & Son Limited (NYSE: NTB) announced stable earnings in its third-quarter results on November 1, 2024. The financial institution reported a net income of $52.7 million and a core net income of $52.8 million, with a core return on average tangible common equity of 22.5%. Despite a slight decrease in net interest margin to 2.61%, the bank demonstrated resilience with increased deposit balances and strong asset quality. Management emphasized their strategic focus on capital management, expense efficiency, and potential expansion in offshore financial markets.
Key Highlights:
– Net income was $52.7 million, with core net income at $52.8 million.
– Core earnings per share reached $1.16.
– Net interest margin slightly decreased to 2.61%.
– The bank approved a quarterly cash dividend of $0.44 per share.
– 1 million shares were repurchased at an average price of $37.
– Deposit balances increased to $12.7 billion.
Company Outlook:
– Management is optimistic about growth opportunities in offshore financial markets.
– Focus remains on capital management and expense efficiency.
– The bank is considering expansion in Bermuda, Singapore, and the Channel Islands.
– Anticipates normalized past due balances by 2025 and solid lending prospects.
Bearish Highlights:
– Slight decrease in net interest margin to 2.61%.
– Cost of deposits rose to 191 basis points.
– Some customers are expected to withdraw funds.
– Upcoming changes in the U.K. budget may impact the housing market.
Bullish Highlights:
– Deposit balances rose, reflecting a diversified deposit base.
– Strong asset quality with low credit risk in the investment portfolio.
– Net charge-off rate maintained at three basis points.
Misses:
– Non-interest income primarily driven by higher card volume and loan repayment fees.
– Core non-interest expenses decreased by 1.8% to $88.6 million.
Q&A Highlights:
– Management anticipates a slowdown in deposit cost increases and expects overall deposit costs to decline.
– The company remains conservative in underwriting standards, particularly in markets like Bermuda and Prime Central London.
– Prioritizing dividends, share buybacks, and potential acquisitions, especially in trust services.
– Investments in technology to enhance client experience and efficiency are planned.
The Bank of N.T. Butterfield & Son Limited continues to adapt to the changing economic landscape with its strong third-quarter performance and strategic initiatives. Management’s focus on maintaining a robust balance sheet, investing in technology, and exploring growth opportunities positions the bank well for future challenges and successes. Investors and stakeholders will closely monitor Butterfield’s progress as it navigates through the remainder of 2024 and into 2025, balancing cost management with expansion and innovation. Butterfield’s success is attributed to its client-focused products and services, strong balance sheet, focus on efficiency, capital management, and experienced management team. The bank’s island-based deposit funding and diversified revenue streams have proven to be resilient. Butterfield is a market leader in banking and private trust in Birmingham and the Cayman Islands, with expanding offerings in the Channel Islands. Specialized financial services are also provided in the Bahamas, Switzerland, Singapore, and the United Kingdom, including high-end mortgage lending in Prime Central London.
In the third quarter, Butterfield reported strong financial results, with net income of $52.7 million and core net income of $52.8 million. Core earnings per share were $1.16, with a core return on average tangible common equity of 22.5%. The board approved a quarterly cash dividend of $0.44 per share and continued share repurchases. Net interest income before provision for credit losses was $88.1 million, benefiting from increased average interest-earning assets. The net interest margin was 2.61%, slightly lower than the prior quarter due to deposit cost increases outpacing asset repricing.
Non-interest income totaled $56 million, with increased card volume and loan repayment fees contributing to the increase. Core non-interest expenses decreased by 1.8% compared to the prior quarter, primarily due to lower professional services costs. Butterfield’s balance sheet remains liquid and conservatively positioned, with period-end deposit balances increasing to $12.7 billion. Asset quality remains strong, with low credit risk in the investment portfolio and adequate loan asset quality.
Overall, Butterfield continues to demonstrate financial strength and stability, positioning itself as a leader in the banking and private trust industry. Slide 11 presents the average cash and securities balances with a summary of interest rate sensitivity. Asset sensitivity increased slightly in the third quarter after recent monetary policy easing, while duration remains stable. Improvement is expected with additional burn down of OCI over the next 12 to 24 months. Net unrealized losses in the AFS portfolio included in OCI were $117.1 million at the end of the third quarter, an improvement of $59.7 million, or 34% over the prior quarter. Slide 12 summarizes regulatory and leveraged capital levels, showing that Butterfield’s capital levels are conservatively above regulatory requirements. Tangible book value per share accretion increased by 9.3% to $21.90 in the quarter as market interest rates declined and unrealized losses improved. Now, I will turn the call back to Michael Collins.
Michael Collins: Thank you, Michael. We believe we are located in the best-in-class offshore financial jurisdictions with opportunities for selective growth through M&A and organic business development. Our balance sheet and liquidity levels are well-suited for our business and regulatory needs. Our capital-efficient fee businesses provide leading products and services tailored to meet the needs of our island-based clientele. We focus on enhancing efficiency and strategically managing expenses as interest rates decline. Capital management has been an important tool for us as we continue to generate significant earnings to support cash, dividends, organic growth, potential acquisitions, and share repurchases. We are well-positioned to profitably grow and meet the needs of all stakeholders while supporting value for shareholders. Thank you, and with that, we are ready to take your questions. Operator?
Operator: Thank you. [Operator Instructions] Our first question is from David Feaster from Raymond James. Please go ahead.
David Feaster: Good morning, everybody.
Michael Collins: Morning, David.
David Feaster: I wanted to start by asking about the deposit side. The deposit balances have held up better than expected, with some transitory deposits taking longer to leave the bank. We have seen movement in deposit balances over the quarter, with some funds being deployed by customers and deposits being activated. We continue to track deposits that are expected to leave at some point. In terms of deposit gathering activity, we have seen success in the Channel Islands market, with deposits increasing due to the strengthening British pound and underlying volume growth. We expect the balance sheet to remain relatively steady or shrink quarter-over-quarter as these deposits flow out.
David Feaster: Moving on to credit, we have seen some credit migration and are monitoring the health of mortgage borrowers and the housing market in our jurisdictions. We have transitioned some borrowers to fixed-rate mortgages and believe that lower interest rates could provide relief for these borrowers and improve credit quality. The pipeline for lending opportunities remains solid, and we expect additional opportunities as rates moderate. We are focused on maintaining conservative underwriting standards across all markets, including the back book and credit aging migration. We are working through legacy facilities, such as the hospitality facility in Bermuda, and expect to conclude with a sale this quarter, resulting in full repayment to the bank. In Prime Central London, we are working with borrowers on delayed repayments of sizable facilities, but remain well collateralized with 60-65 LTV and three to five year facilities. We expect some past due to be elevated this quarter, but anticipate normalization in 2025.
In terms of property valuations, all three islands have housing shortages due to limited land supply and booming industries, which keeps valuations steady. We are comfortable with our loan-to-value ratios. We have not seen a significant increase in customers facing financial difficulty despite the high interest rate environment. The trust business has been successful, particularly in Singapore, where we are a top 5 trust company and making decent profits. We expect this part of the business to continue driving global growth.
Regarding deposit costs and margin dynamics, we have seen a slowdown in the increase of deposit costs, with only a 2 basis point increase last quarter. We are focused on appropriate pricing of deposits and have conducted market reviews to ensure we are competitive in our pricing. We have incorporated the recent Fed funds rate cut into our pricing strategy and anticipate a decrease in deposit pricing going forward. We will focus on expanding our presence in our current jurisdictions of Bermuda, Cayman, Guernsey, and Jersey for banking and Bermuda, Cayman, Bahamas, Guernsey, Jersey, Geneva, and Singapore for trust services. We believe in the importance of understanding and being familiar with the markets we operate in. We do not plan to venture into other jurisdictions where we may not have a competitive advantage. Our focus will be on growing our trust services in Singapore and expanding in Cayman and the Channel Islands. We will continue to explore opportunities in these markets while staying true to our expertise and comfort level in our chosen jurisdictions. Thank you for joining us today for our conference call. We appreciate your participation and look forward to speaking with you again next quarter. If you have any further questions or need additional information, please do not hesitate to reach out to us. Have a great day!